BMO Capital Markets recently increased its target for the S&P 500 (^GSPC) to 5600, the highest forecast on Wall Street. The Dow Jones Industrial (^DJI) recently crossed 40,000 in an all-time record, with some on Wall Street confident the rally can continue. Is the bullish sentiment a little too optimistic, or is this moment the beginning of a strong rally?
BMO Capital Markets Chief Investment Strategist Brian Belski joins Catalysts to discuss how the broader market can continue to rally to new record heights.
Belski explains what elements of the current economic landscape give his bullish stance credence: “Given what we’re seeing in earnings, given what we’re seeing and hearing from what the Fed is going to do, and we think equities now are becoming an increasingly important part of people’s asset mixes, especially considering what’s gone on in the bond market, in the unwind of what we like to call the 40-year bull market in bonds, we think that there’s more upside.”
For more expert insight and the latest market action, click here to watch this full episode of Catalysts.
This post was written by Nicholas Jacobino
Video Transcript
Well, first our big story and that is markets just at record highs here today.
You’ve got the S and P 500 just around that 5300 mark, the dow hitting 40,000 yesterday.
Our next guest seeing more room to the upside.
He’s got a year end target for the S and P 500 of 5600, the highest call on the streets.
So let’s bring him in.
We’ve got Brian Belly’s BMO capital markets, a chief investment strategist, Brian.
It’s good to see you.
So you and I were talking not that long ago.
You sounded a bullish for your previous target.
Now you’re raising.
Why now?
And what’s the catalyst, Shana?
Good morning, good morning, Yahoo.
Um You know, a lot of people were telling or accusing us of being bearish because we said uh in late February that the market was getting a little tippy toppy and needed to be sideways here, especially considering the type of move that we saw.
You know, we really believe first off that us stocks are in a 25 year secular bull market.
Uh Number two, we believe that the cyclical portion of the bull market means this new cyclical bull started in October of 2022 typically.
And historically, the second year of a bull market has a, has an average correction of 9.6%.
Um, and we didn’t see that we only had like a 5% correction.
And so given what we’re seeing in earnings, given what we’re seeing and hearing from what the fed is gonna do.
And we think equities now are becoming an increasingly important part of people’s asset mixes, especially considering what’s going on in the bond market in the unwind of what we’d like to call the 40 year bull market in bonds.
Uh We think that there’s more upside and so it doesn’t mean that stocks are gonna be linear forever.
Uh We are going to see some sort of a normal correction and I think that’s a better buying opportunity, but for now, I think the screens are green and the skies are blue and we’re going to have a little bit more upside here.
Brian, what do you think that correction, that short term correction could look like?
Well, I think it comes from a higher level.
So, you know, a lot of the technicians out there use this phrase higher lows.
I think this period, this year is gonna be a period of higher lows.
So I think the correction comes from a little bit higher prices and so it would be from a, from a technical perspective and from a just a pure health perspective of the market.
It would be nice to um take a, take a bit of a breather here uh in the, in the bull market in the upside price appreciation, take a respite, get ready for the summer into the fall.
And I think uh fourth quarter in particular, especially post election will do very well.
But Brian, what would the catalyst for that pullback be?
I mean, this market is acting like that CP I print was the best thing it’s ever seen and it really wasn’t that soft.
No, it wasn’t.
That that actually is a really great uh point.
I think that we as investors um have and when we reared an entire generation of investors that only believe that stocks go up with interest rates go down.
And if you think about it, we enter 2024 meaning the stock market and the investing world thinking and believing that the FED is going to cut six times with all the sudden that changed.
And as early as 10 or 14 days ago, people were talking about the fed raising rates.
And so I do think that we’re transitioning quite frankly into more of a trading range environment, more of a focus on the stocks versus uh the forest through the trees.
Uh let’s call it versus all this macro data.
So what could be the catalyst?
I think for a pullback would be some sort of a near term a scare in interest rate, some sort of a near term, uh, momentum change whether or not it’s geopolitical or not.
I don’t think it’s fundamental, I don’t think it’s fundamental is because the earnings prowess of the United States stock market is very strong, the cash flow strength is strong return on equity is strong.
And we do think actually there’s a portion of the market quite frankly where numbers are too low, especially namely in some consumer stocks.
But financial finance, financials, I think an area where analysts have been too conservative in their outlooks.
And I think a lot of earnings power will come from the financial sector.
Well, Brian, let’s talk about earnings.
I always love to monitor mentions of things and earnings.
That’s always fun.
Pricing power mentions are down expense management mentions outpacing pricing.
Power mentions by quite a bit here.
Can companies in the S and P expense manage their way to 5600 expense managing their their way through the last 15 years for all intents and purposes?
It’s called under under promise and over deliver.
Uh we on Wall Street as investors or portfolio managers, which we are as well.
We love it, love it, love it, love it, love it when, when companies cut costs and shut down divisions and restructure because it shows that they’re having discipline.
That’s why if you take a look at free cash flow and you look at the operating performance, whether or not it’s return on as return on invested capital return on equity has been so strong.
Um, you know, we think too from the discern ability of earnings and the consistency of earnings is stronger that we’ve seen in prior big bull market cycles.
And so to me, this reminds me a lot more of the mid nineties prior to the irrational exuberance of 1996 which, oh by the way, was, had nothing to do with tech stocks, had everything to do with the consumer staples area.
What you’re talking about pricing power, like you remember the consumer staples um sector benefited from food inflation and their and their earnings have been strong.
Now you’re starting to see those stocks roll over.
That’s why like a stock like Walmart, it’s just a juggernaut.
They’ve done an amazing job with their inventory in their stores and in the, in the especially in the grocery side.
Uh but that, that stock in particular, I think is kind of bucking the trend and the in a consumer staples sector, by the way, which we think is increasingly expensive.
And one we think you should ignore, aside from, let’s say Walmart and Costco Brian, going back to where you are seeing those, those opportunities within the market.
You mentioned financials, you’ve been overweight that sector now for some time, you’re expecting that out performance here when it comes to future earnings.
Where else are you seeing that opportunity and have that at all?
Changed from when you initially came out with your S and P target for the year.
No, it hasn’t changed.
I mean, we’re right now positioned as a Barbell, right?
O overweight um technology and financials.
And I think the difference with technology the second half of the year is dare I say they’re not quite second tier companies, they’re not, they’re not Microsoft and Apple, which are really the part uh in NVIDIA, part of the, the magnificent seven which oh by the way, uh number seven in the magnificent seven is Hathaway.
So uh so the the financial stock has kind of snuck into that be that as it may.
I think stocks like Qualcomm and A MD and Broadcom and Oracle and Salesforce and Adobe.
Um some of the second tier companies relative to the top ones like Microsoft and Apple, I think we’re gonna take more buying power and more kind of increased money.
I think too, that we’ve seen an overall broadening out of, of the market.
You’ve seen the equal weight that S and P uh hit new highs and you’ve seen look at small and mid cap are doing very well as well and I think that’s the opportunity there.
So I think that overall broadening out and they don’t also forget, um healthcare, healthcare is the second largest sector in the market.
And um I think healthcare aside for so much which is uh focus has been on Lily and the like which we are very fortunate to own the stock.
But you know, the United Healthcare and the Mercks and the Engines of the world I think are, are stocks that could do very, very well.
The second half of the year.
All right, Brian, we’re gonna have to leave it there.
Thank you so much for joining us.
We really appreciate it.
That was Brian Bell.
He is BMO Capital Markets, Chief Investment Strategist.
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